e can further divide the middle classes into three segments: from 120,000 to 200,000 RMB; from 200,000 to 400,000 RMB; and 400,000 to 1 million RMB for the upper-middle class. Beyond this level, we move into the upper class.
Another important distinction is the distribution of these different segments of the middle classes, who are for the most part city-dwellers. First-rate cities, like Shanghai, Beijing, Shenzhen, and Canton, are home to most of the second and third segments. The middle classes in second-rate cities are from the first and second segments.
Une autre distinction importante est la répartition de ces différentes tranches, essentiellement urbaines. Les villes de 1er rang, soit Shanghai, Beijing, Shenzhen et Canton dont les revenus se concentrent l’essentiel des 2ème et 3ème tranches. Les classes moyennes des villes de 2ème rang se situent dans la 1ère et la 2ème tranche.
Urban density and property price rises
The density of the middle classes in top-rated cities is the result of constantly rising salaries that have increased by as much as 8, 15, and even 20 per cent in certain sectors over the past seven to eight years, primarily affecting the tertiary sector. These dramatic rises can partially be explained by the cost of living in cities such as Beijing and Shanghai, which is now higher than in Western cities, as a recent comparison by the Financial Times has revealed.
The property market has seen considerable rises. In Shanghai, for example, the price per square metre has gone from 4,000 to 5,000 RMB in 2000-2001 up to between 80,000 and 100,000 RMB today. (It should be noted that these prices include a compulsory fee of around 30% for communal areas). These rocketing prices demonstrate the incredible accumulation of wealth by this significant section of the Chinese population. Today, spending 2 to 3 million RMB to buy a home has become commonplace. That being said, in China, as in the West, social differences have been exacerbated.
The majority of wealth is concentrated in top-ranking cities – where land is now becoming scarce – as these are magnets for growth, where you can find more opportunities, where you can get rich, and where the money is. On the other hand, third- and fourth- rate cities are experiencing serious difficulties. There has been a lot of speculation, meaning that many new buildings now lie totally empty.
Retail property is also noticeably suffering, following rapid changes in purchasing habits. We’re now witnessing a real explosion in e-commerce. While the majority of sales take place in a select few shopping malls, many others are suffering badly, with some closing altogether. Although it has to be said that in some places shopping malls are to be found every 100 metres. Department stores are also seeing a real loss of interest, and business has slowed or come to a total stop for many single-brand stores.
Mechanical watches — the absolute priority
Three recent studies on watch-buying in China have revealed interesting insights into the market, all drawing similar conclusions. They were conducted between 2014 and 2015 on very large samples of the population between 18 and 55 years old. According to the results, the Chinese love watches and nearly 50 per cent of those questioned said they had more than three, and between 21 and 25 per cent have up to five.
As for the reasons behind their purchase choices, one-third said the brand is the most important factor, while another third prioritises style, materials, and the movement, with a mechanical movement an absolute must-have for 85 per cent of those surveyed. Only 25 per cent prioritise price, and the remaining 5 per cent focus on after-sales service.
According to a recent study by Bain & Company in the fourth trimester of 2016, watch purchases in China have decreased in value by 8 per cent, but we’re seeing a rise in private and local-level purchases of luxury products. Don’t forget that since 1 April 2016, all luxury goods (over 10,000 RMB) purchased abroad must be declared to customs and taxed at 60 per cent. Local purchases are also taxed at about the same rate (20 per cent customs duties, 20 per cent luxury products tax, and 17 per cent VAT).
As for internet purchases from foreign websites, you are exonerated from customs and VAT up to 20,000 RMB. Above this amount, you must pay the taxes in full.
Another interesting phenomenon is the development of duty-free stores selling mid-range watch brands within China itself. In one of these stores, a Chinese person coming back from abroad can make a purchase of up to 5,000 RMB tax-free. The idea is to encourage the consumption of goods within China itself. That said, I anticipate that import taxes will be reduced for watches below 10,000 RMB. But not for luxury watches above 100,000 RMB. But this category represents less than 15 per cent of watch purchases, while 60 per cent are for less than 10,000 RMB, 20 per cent below 50,000 RMB and 6 per cent are between 50,000 and 100,000 RMB.
Around 80 per cent of Chinese consumers say they prefer buying Swiss watches. But notably, for them it’s the brand’s Swiss origins that count, and not about being Swiss Made, as the latter is not a key factor in their eyes.
After-sales service, a major factor
Anti-corruption and anti-extravagance campaigns have upset buying habits. Now, the Chinese buy for themselves, and we can see that purchases from 50,000 to 100,000 RMB have decreased. Tastes have also been affected. Consumers are less partial to brands seen as being ‘for the rich’, and are more interested in simplicity and refinement. When selling to the middle classes, the notion of quality is important, of course, but the word ‘timeless’ doesn’t mean much to the mid-range Chinese consumer. It needs to be ‘fashionable’, but not so much that it risks becoming quickly outdated. Elsewhere, brands need to be aware that the quality of after-sales service is an increasingly important purchasing motivation. Many consumers don’t trust Chinese watchmakers’ after-sales service. They fear being tricked, and that original gold components will be switched with fakes without their knowledge. And if they have purchased a Swiss watch, they often don’t know who to send it to, who to trust for after-sales services. It’s a major issue. They also prefer mechanical watches, since these are expensive and open doors to the upper-middle class and the country’s wealthy elite. It’s a sign of success. For men, social status is the primary concern.
Women care more about design and fashion, yet a mechanical movement is important to them, too. There has been a significant increase in women’s purchasing power and we are seeing more and more women collecting watches for themselves. Out of 100 watch purchases in China, 40 per cent are made by women. Just three years ago, it was only 27 or 28 per cent. Finally, we must not forget that Chinese consumers learn fast, very fast. Online, through social networks, and on their travels, they seek out information, make comparisons, search for more personalised styles, and now even look for niche brands. Chinese watch lovers have truly come of age.
(100 RMB = around 15.- CHF)
Regarding the brands most sought-after by the upper-middle classes, the studies largely agree: Omega is clearly no. 1, in second and third position are Longines and Rolex or Rolex and Longines respectively, Tissot is fourth, Citizen and IWC are fifth, and Rado is sixth. While Cartier comes top for jewellery, the brand is ranked eighth for watches.
The Chinese love innovation, but when it comes to watches, it’s clearly not what they’re primarily looking for. 86 per cent prefer the mechanical watch and fear that the smartwatch, while trendy, will quickly become outdated. 55% say that they will definitely never buy a smartwatch. 32% are unsure, saying they will see how smartwatches evolve but don’t intend on buying one in the immediate future.